The Participation and Civic Engagement Team works to promote poverty reduction and sustainable development by empowering the poor to set their own priorities, control resources and influence the government, market and civil society institutions; and influencing governmental and private institutions to be responsive, inclusive, and accountable. Note No. 78 March 2003 Case Study 2 ­ Andhra Pradesh, India: Participation in Macroeconomic Policy Making and Reform India: Power Sector Reform in Andhra Pradesh1 poorest states in India. Its population of almost 80 million approaches that of the Philippines, the 13th Background most populous country in the world. Even as its high-tech industries develop rapidly, AP's overall For the past six years, the State of Andhra Pradesh literacy rate remains a modest 44% and one-third of in India has been at the vanguard of efforts to the population lives in poverty. modernize the economy and the state while pursuing policies to improve the lives of the Nonetheless, Andhra Pradesh has achieved greater poorest. The Chief Minister and head of the ruling success than many neighboring states that set off on Telugu Desam Party (TDP), Mr. Chandra Babu similar reform efforts several years ago. Due to Naidu, is known by some as the "Laptop Minister" India's quasi-federal system, state-level reforms for his modernizing initiatives. He has reached out have moved at their own pace and taken varying to international organizations and investors but has forms. While there are many factors at work, at also maintained his base of support at home, in part least part of the success in Andhra Pradesh can be through expanded programs in education, health, linked to high-level government commitment and and rural development. "I have initiated so many involvement of a constantly widening circle of key things," Naidu said. "They are going on and will stakeholders2 in the design and implementation of pay off after some time. But people need these reforms. something today." Naidu's well-known "Janmabhoomi" (motherland) The challenges facing the government are daunting. program, launched in 1997, has permeated every Andhra Pradesh (AP) is one of the largest and corner of the state. The program brings government 1Information in this case study is drawn primarily from 2 Stakeholders are defined here as all those individuals Rajen Harshe, Stakeholder Participation in Andhra and social groups who potentially would be affected by Pradesh Reform Process (2001). the reforms either directly or indirectly. ___________________________________________________________________________________________________ This note was prepared by Madalene O'Donnell and Parmesh Shah of the Participation and Civic Engagement Group in The World Bank as a case study input on "Participation in Macroeconomic Policy Making and Reform" for the Action Learning Program on "Participatory approaches at the Macro level". Further details and documents related to this Action Learning Program are available at www.worldbank.org/participation The views expressed in this note are those of the author(s) and do not necessarily reflect the official policies of the World Bank. and voluntary organizations together in support of power continued to rise steadily and, inevitably, village-based initiatives to improve literacy, clean power shortages increased. the environment, upgrade local infrastructure, and improve community health services. Naidu has Across India, a similar story was unfolding. called on all government departments to Malfunctioning State Electricity Boards (SEBs) and "internalize the values and principles of yawning gaps between supply and demand were Janmabhoomi" and "foster collaborative creating growing concern.5 A decision of the partnerships with the private sector, Non- central government to encourage private sector Governmental Organizations, and the people" in participation in power was never implemented realizing its goals. Transparency and accountability effectively and unlikely to succeed without have been repeatedly emphasized. structural reforms at the state level. By 1996, a common Minimum Action Plan was drawn up with The Naidu Government has had considerable input from Chief Ministers of the states that called success in converting the principles of participation for: (i) setting up of Central and State Regulatory and collaboration into important gains in irrigation Commissions; (ii) Rationalization of Retail Tariffs, and forestry sector reforms. But efforts to reform (iii) unbundling of the SEBs into more manageable the power sector have proven more difficult. This entities with discrete functions; and (iv) private case study looks at reforms in this sector and efforts sector participation in distribution. to engage key stakeholders. Process and Institutional Arrangements Key Stakeholders: Power Sector Reform in Andhra Pradesh Broad Information Dissemination - Government ­ cabinet officials and political parties in opposition Reform of the power sector, in any country, - Andhra Pradesh State Electricity Board (APSEB) ­ has presents particular challenges because the number over 74,000 employees of groups directed affected. The first step by the -Farmers -- the largest user group but dispersed in rural areas Andhra Pradesh government was to appoint a high- -Households -- also important consumers and level committee in 1996 that included several concentrated in urban areas former chairmen of the APSEB. Also in 1996, the -Industry ­ significantly affected by energy cuts; largest APSEB began circulating bulletins in English and firms may pursue alternative sources the local language, Tegulu, about the urgent problems in the power sector and the need to The power sector is currently creating a tremendous address them quickly. The bulletins highlighted the drain on government resources3 and most would growing gap between supply and demand, the argue that reform of this sector is the single most increasing price of generating power and the rising important element of structural and fiscal reform in deficits. Later bulletins discussed metering and AP today. In 1991, the financial condition of the billing, explaining commercial losses and theft of Andhra Pradesh State Electricity Board (APSEB) energy. An inexpensive, pocket-size explanation of began to deteriorate rapidly and, in the years that the key issues in the power sector and the case for followed, its once-exceptional record of profitable reform was circulated all over the state, reflecting a operations was reversed. By the time Mr. Naidu government commitment to disseminate took office, APSEB's losses were mounting at an information on a massive state-wide scale. astounding rate4 and its outstanding liabilities were ballooning. These huge liabilities prevented Given low literacy rates, particularly in rural areas, APSEB from mobilizing internal resources or additional steps were clearly necessary simply to private-sector lending to expand its generation, inform key audiences, let alone obtain their active transmission and distribution capacity. Demand for participation. A 15-minute film was produced and aired broadly throughout Andhra Pradesh using the 3In 1996 and 1997 power subsidies amounted to over 39 theme of arranging a match for a marriage under the percent and 46 percent respectively of the fiscal deficit of auspices of the APSEB. In the film, a variety of the state. participants from diverse social and professional 4 APSEB losses rose from approximately $9.3 million in FY1980-81 to $245.6 million in FY1997-98. Accumulated commercial losses (excluding government 5Commercial losses of the SEBs totaled $3 billion or subsidies) were $900 million in March 1998. about 1 percent of India's GDP in 1999. backgrounds participated in the discussion and efforts, contradicting government pro-reform explored the merits of reform. arguments and undermining public support. Failure to secure their support or dent their opposition Finally, the Chief Minister became directly would create significant problems during involved. A discussion of the power sector figured implementation. prominently in three successive episodes of the "Dial your C.M.", a weekly televised program Soliciting Input on Draft Government Proposals launched by the Chief Minister's office. After receiving the recommendations of the high- Building Support among Electricity Board level commission, the government issued its Policy Employees Statement in February 1997 that outlined the proposed reforms. Mr. Naidu initiated a dialogue A clear priority was to gain support for reform with diverse groups of stakeholders, including within the monolith of APSEB and its 74,000 industrialists, agriculturists, nongovernmental employees. The Chief Minister moved early to organizations and journalists. identify concerns and build support by appointing a three-member cabinet subcommittee, including the The commission recommended that the Finance Minister, Home Minister and Energy government: (i) divide APSEB into three separate Secretary. Top-level management of APSEB entities along functional lines (power generation, recognized that reforms offered the only hope of distribution, and transmission); (ii) revise the restoring financial viability. But rank-and-file as regulatory framework, including rules for tariff- well as mid-level engineers and professionals had setting and policies for overall sector development; strong concerns about the impact of reforms on job and (iii) take steps to facilitate private sector security and conditions of employment. The investment in power generation and distribution. government offered assurances to workers and The government endorsed these objectives and entered into negotiations over revised terms and stressed the importance of separating out the conditions that linked performance to higher levels management, regulatory, and policy functions. of compensation. After sustained efforts, the APSEB's role, they believed, should be limited to government was able to rally some 90% of the management but given more operational autonomy employees to its side during the crucial start-up to meet its obligations. The government should period. In late 1997, all but one of the unions limit its role to policy-making and keep an arm's representing APSEB employees signed new length from regulatory functions. agreements which defined wages, salaries, benefits. Clauses were added which expanded the In April 1998, after fourteen months of public participation and representation of workers in a debate on its initial Policy Statement and resolution special government Task Force on reform policy of key APSEB concerns, the state cabinet moved and on the Board of Directors of successor entities forward with legislation, approving the AP to APSEB, thereby providing institutional Electricity Reform Act of 1998. It was passed by mechanisms for consultation and participation the legislative assembly (in which the TDP had a which have yet to be tested in practice. One 2/3 majority) two weeks later and approved by the important union, however, continued to oppose the President in October 1998. The government then reforms and went on strike in April 1998. moved forward quickly with implementing its key elements. First, the APSEB was restructured into Reaching Out to Potential Opponents two independent corporations (AP Transco for transmission/distribution and AP Genco for The main opposition to the government TDP was generation) in February 1999. Second, the the Congress Party. In August 1997, the independent AP Energy Regulatory Commission government convened a meeting of all political (APERC) was formed in March 1999. parties and laid out its proposal to restructure APSEB as the first step in reforming the power Implementing Reforms and the Proposed Tariff sector. The Congress Party boycotted the meeting Hike and the smaller parties present rejected the government plan. In the months that followed, Budget preparations for the coming year quickly opposition parties launched their own outreach confronted the government with the need to define the subsidies and estimated tariff increases required APERC premises, and was provided summary for operations of the power sector. The decision information in the evening. whether to approve a tariff hike and the form it would take fell to the newly-created and little- Handling Conflict known APERC. Their first step was to prepare a "philosophy paper" on tariff policy. Their second Meanwhile, the government moved forward with its step was to open up the process for debate and budget process and allocated approximately half the discussion in an attempt to demystify the complex amount of the subsidy requested by AP Transco, topic air concerns. APERC officials quickly thereby putting the onus on APERC to make up the organized large public meetings with key remaining shortfall with cost savings or tariff stakeholders in three of the largest cities in increases. APERC issued its recommendations in November 1999. June 2000 and the thunderstorm struck. The consultations to date had shed light on varying The nature of the meetings, however, did not lead to positions but had also raised expectations and, more a constructive exchange of views on the problems importantly, had failed to bring the users on board and how to resolve them. Instead, an unwieldy total as partners in helping APERC and the government of over 300 interested participants gathered in each wrestle with the horns of the dilemma: how to keep city. Farmers, in particular, dominated the user costs as low as possible while addressing the discussions, drowning out other voices and flatly continued revenue shortfalls in the power sector? opposing a tariff increase. The gap in What would be the basic principles to ensure the understanding here was particularly large since the burden of a tariff hike is shared equally? While philosophy paper itself had identified unmetered APERC argued that it had modified the structure of agricultural consumption as a significant problem to tariff fees to address several concerns raised during be addressed and, in later discussions, small-scale discussions6, the end result was a rate hike across- businesses would effectively argue that they were, the-board, including a 54% increase for domestic in fact, subsidizing agricultural users. Some users, without a clear application of any standard specialized groups did provide written comments on rules. The conflicting array of domestic users, the paper. farmers, small business and large industry had found a common complaint. In April 2000, AP Transco projected its losses in the coming year and proposed to cover 22% Both the government and APERC put forward a through tariff hikes, 14% through efficiency gains, number of arguments, explaining that the rate hike and 63% through government subsidies. Once would not affect 68% of households (with usage again, APERC invited representatives of all below a given amount), that it was lower than rates interested parties to present their views on a in all neighboring states, that last-minute savings proposed tariff increase and published a notice in had been required from AP Transco to reduce the newspapers inviting groups and interested size of the increase ­ but without effect. The individuals to a public forum. Approximately 78 government quickly came forward with a new organizations came forward at the April forum. In targeted subsidy for domestic users but this was May, a four-day consultation was held with 26 barely noticed. A low tariff increase for organizations, including agriculture groups, agricultural users muted their opposition but did not domestic household consumers, businesses, large- reverse it; this policy was successful, however, in scale industry, railways, etc. This time, there was a generating a steady stream of new requests for substantive exchange of views with groups putting metering by farmers seeking to legalize their forward proposals for changes in the system of connections. billing, using competing arguments of equity and fairness. There was a recognition by many users The overwhelmingly hostile reaction presented the that the mounting losses in the system needed to be first major challenge to reforms initiated by the addressed but many remained unconvinced that all Naidu government. The legal underpinnings for cost-saving measures had been taken to minimize the need for a tariff increase. Farmers continued to hotly contest estimates of unmetered agricultural 6For example, households and others were converted use. The press was not given access to the from a flat rate to one that increases as consumption proceedings, presumably due to lack of space in increases and the agricultural tariff was fixed at a low level to provide an incentive for metering. power sector reform were in place but could not be The Naidu cabinet reached out to the employees of successful implemented without some form of tariff the power sector and, to the extent possible, took increase. The opposition parties, feeling sidelined measures to address the key concerns of the distinct by the process to date, seized the opportunity. They groups within it ­ the unionized workers, middle helped to mobilize all affected groups in a sustained management and top management. While some campaign against the hike. The media provided resistance to reform continues among workers, broad coverage of these activities. Following concessions were made that have allowed reforms hunger strikes, demonstrations, and assembly walk- to move forward. This is no small achievement outs, the campaign reached a crescendo on 28-29 given the strong interests at stake and the links August 2000. Demonstrations turned violent, between unions and opposition parties. leaving two dead and several injured. When necessary, at key moments in the process, the The government TDP and Congress parties traded Chief Minister stepped in directly to lead charges furiously in the wake of the tragedy. The discussions with key stakeholders and maintain government was called an agent of the World momentum. The government seemed to understand Bank.7 The Congress Party was accused of playing that confronting critics is also part of the process of a destructive role and drawing in extremist groups. building a coalition for reform. Involving key In this context, a government agreement for a new stakeholders is a process of working from the inside loan from the World Bank to finance power sector out, developing alliances (i.e., between government reform came before the Legislative Assembly for officials and APSEB management) and gradually discussion. What further poisoned the atmosphere building the case for reform. was that the opposition was not even informed of the details and rationale of the loan until one or two But some of the information dissemination and days before the open debate. Since the loan was for government-led consultation seemed to diminish as a program of implementation over several years the process accelerated and became more complex (and would require several additional tariff hikes), a and the government seemed to take a slightly more united front of support was critical for effective distant stance. The Chief Minister became less implementation and sustained commitment to the involved directly and the most sensitive issue, the program. Meanwhile, efforts continue to exert tariff hike, was left largely to the APERC, a newly pressure on APERC and the government to rollback created institution, to handle. This may have been a the tariff increase. reflection of APERC's status as an independent body. Nonetheless, a more sustained, direct Results and Lessons involvement by the top government leaders and continued messages to the public would have added The Naidu government took the initiative and credibility to the effort. The good will that the effectively built early momentum behind reforms in government had established through Janmabhoomi the power sector. It developed an initial policy and other programs could have been brought to bear proposal and took the initiative in airing this to reach out to larger constituencies, particularly in proposal for broad discussion. It produced simple, rural areas, and involve them as constructive critics explanatory documents and films and disseminated rather than as outspoken opponents. On technical these widely in order to demystify the issues to be aspects, it is appropriate that the power company addressed. and APERC take a lead in developing reforms. But a continued leadership role by the government was Both the government and, later, APERC made essential because the issues and tradeoffs went far effective use of `white papers' or discussion papers. beyond the power sector. These were useful as a tool to launch debate in a transparent fashion without locking the government By changing the sequencing of reforms, the into a rigid position. government might have advanced reforms more effectively. For example, the government could have undertaken a serious program to reduce losses through theft, including prosecution of key offenders, before calling on users of power to pay 7 The World Bank provides more credits to Andhra higher tariffs. Then the case for raising tariffs Pradesh than any other state in India due, in large part, to might have been made with more credibility. Many its strong track record on leading reforms. were of the opinion that they were being made to opposition to the price hike. This office did not pay for the huge amounts of deficit accumulated open until quite late in the process. In general, over the years due to the government's inability to polling and survey efforts are a very valuable tool control the theft of power. In fact, a very successful in mapping out a strategy for coalition-building and initiative, the Shaktiman Scheme, was carried out can be valuable throughout both the design and and made important inroads.8 But the scheme was implementation of reforms. For example, AP not launched until November 1999, the same month Transco was also using surveys to understand the that APERC was circulating its `philosophy paper' different power needs among agricultural users that and launching large forums to debate the proposed relied upon pumpsets vs. canal-based irrigation tariff hike. By the time program bore fruit, the systems in order to improve service provision. public was not in any mood to hear the good news even though it was given significant coverage by Looking back at the tariff hike decision, it seems the media. This was reinforced by the fact that the that the APERC designed a tariff structure that was APERC decision clearly endorsed a tariff hike but technically defensible. But clearly this was not did not take a clear position on transmission and enough and this was not the perception of most key distribution losses. stakeholders, with the possible exception of agricultural users. It is easy to see, with hindsight, APSEB and AP Transco made considerable efforts that more efforts were needed to build support or, at to develop an effective communications strategy least, reduce opposition, to a tariff hike. but, by that time, they faced a very difficult and hostile climate. It was very hard for their messages There are four ways in which the chances of to get through. For example, AP Transco produced success might have been improved. a 21-minute film that aired one month before the Assembly debate over the World Bank loan. The First, resequencing, as indicated, might have put the film did not make any tangible progress in denting government and AP Transco in a better position to the opposition to reforms. An international address concerns about financing power sector consulting firm was brought in to help create the inefficiencies and corruption. Corporate Communication Group in September 2000. This group would gather information on the Second, while APERC gave key groups an views of different groups and address their concerns opportunity to express their views, it did not through use of the TV and print media. This office structure a process whereby these groups were was an active champion of reforms, highlighting the brought in and confronted with the same trade-offs merits of proposed solutions and raising the facing the government and the power sector itself. prospect of additional cuts in resources for health, Meetings were large and unwieldy and the format education and other priorities if power sector issues led simply to an exchange of opposing views. were not addressed. Third, closer linkage between the budget and the The Corporate Communications Group undertook tariff hike would have made these trade-offs clearer. produced valuable information that was not always Sustained communication efforts did help people to used as effectively as it might have been. The office acknowledge that the government faced a severe hired local think tanks and research organizations to budget constraint but there was little apparent conduct feedback surveys targeting key stakeholder consultation on the budget. The government groups. One survey found that virtually all groups effectively delinked these two processes by were anticipating the power tariff hike but were announcing its FY2001-2 subsidy for the power hopeful that the hike might improve the quality of sector before APERC had issued its decision on a service. This information could have been valuable tariff hike. The government then had to back down, in shaping the reform strategy or identifying under public pressure, and add an additional possible areas of compromise; government officials subsidy targeted to domestic users. might have made explicit commitments about service provision that might have reduced Fourth, when opening up a public policy decision to broader participation, it is very important to frame the choices and not raise unrealistic expectations. 8As of July 2000, 3860 cases of energy theft were For example, APERC might have stated more identified, leading to 900 arrests, Rs 9 crores assessed in conclusively that some form of tariff increase was fees and 25% of fines collected. certain and discussions would be limited to: (i) how opposite effect. In general, a very few governments large an increase (relative to government subsidies might be in the enviable position of being able to and administrative efficiency gains) and (ii) how to take a unilateralist approach. But these policies are equitably share the burden of the tariff hike. often reversed when the next (unilateralist) Governments should never reveal their `bottom line' but they should think carefully, before "Social Development Notes" are published informally by the Social Development approaching key stakeholders, where exactly their Sustainable Development Network of the World Bank. For additional copies, cont 1818 H Street, NW, MSN MC5-507, Washington, DC 20433, USA, Fax: 202 room for maneuver begins and ends and try not to `overpromise' at the outset. government takes over. A good faith effort to build Printed on Recycled Paper support throughout the government and with key In any policy issue of this dimension, the press stakeholders outside the government is often needed plays a critical intermediary role and more effort in to approve reforms and almost always needed to this area would have benefited the government. In implement them. the case of Andhra Pradesh, the press fanned the flames of anger over the tariff hike in a way that In any country, reform of the power sector presents was not constructive. On the other hand, the press particular challenges. The problems are often also gave significant coverage to AP Transco highly complex, the solutions expensive, and the efforts to reduce power losses through theft. array of those directly impacted -- households, APERC lost an opportunity to build cooperation by businesses, farmers -- is daunting. Users are often excluding press from its large consultative hearings. asked to pay more even though the quality of the Similar hearings in neighboring states of Orissa and service is declining. Over the past six years, the Maharashtra were open to the press. path of reform in the power sector in Andhra Pradesh has been anything but smooth. Some The opposition, led by the Congress Party, became important and difficult steps have been taken even a crucial stumbling block to government-led reform though, from the perspective of overwhelmed efforts; could more have been done to bring them public officials on the ground, they might have into the process in the early stages? Certainly, in seemed to race ahead out of control. The reform every context, the nature of the relationship process has been launched, the legal framework between the government and opposition is unique. established, new institutions created and the first By the end, the opposition was completely locked critical steps in implementation are under way. In out of the process by the government; they were order to move forward from here, however, the given little information, for example, on the government will need to find a way to reach out to rationale for the World Bank credit. This is also a domestic users and other key groups and bring them very common tact taken by frustrated governments. into the process of reform. Some elements of the opposition might be willing to come in as constructive partners or constructive Key Sources critics but, given the difficult history and `bad blood' on both sides, these opportunities are too Rajen Harshe, Stakeholder Participation in Andhra often missed when they do present themselves. Pradesh Reform Process, 2001. In some countries, efforts by the government to Andhra Pradesh Sector Restructuring Project, reach out are considered a sign of weakness, rather Project Appraisal Document, World Bank, January than strength. Policy reform is the government's 25, 1999. job, some argue, and should not be put onto the shoulders of others. In this case, it is clear that the Joyce Barnathan, "The Stars of Asia," Business TDP strategy of reaching out to broad segments of Week, June 14, 1999. society has generated credibility and strength. Certain unilateral actions, such as the decision on the FY2001-2 subsidy for power, could not be sustained and the government had to backtrack. This is, of course, a sign of some weakness. APERC might have pursued broad consultations because it felt this would improve the legitimacy of its final ruling but it seemed almost to have the